There is a very easy way available to any modern government in the world to rob most of its population and transfer the riches to few chosen persons. This is how it can be done. Print more money and then distribute the extra money so gained amongst a few rich persons. It causes inflation because of the extra money floating around but the rich who have received most it are more than compensated while the rest suffer the consequences. Their bank balances remain the same but it is worth much less in terms of what it can buy. This is something that is easy to do today when the world is no longer connected to the gold standard in case a government decides to do it. All they have to do is sign a few papers to authorize the deal (couched in fancy language such as quantitative easing) and then punch a few numbers on a keyboard, all from the comfort of their luxurious pads.
This is not an excerpt from the fictional work - 2084 - but some such thing is happening in most countries of the world today where inflation prevails. It may be one of the principal means by which one percent of the world population has acquired over ninety percent of its wealth. In earlier centuries battles had to be fought with the help of the sword to achieve the same end. Modern science and technology has made life so much easier.
In today's complex economy it is useful for the ordinary citizen to understand a few simple principles about economics. That way, they can manage their own money better and also contribute their voice to policy making in their countries. Money is a used for acquiring goods and services and when the price of goods and services rise we say that inflation is taking place. The price of something depends on many factors but two of the primary ones are - demand and supply balance and extent of money supply. Both factors are easy to understand.
If a commodity becomes in short supply then its price tends to rise. The balance of demand and supply is one of the primary factors that determine the price of any of available goods or services. Now let us understand Money supply. For example, let us say any one country doubles its money printing and then distributes it by say doubling salaries then the price of everything in the country will tend to double because twice as much money will be available for acquiring the same amount of goods and services. There was a time when governments could not do. It was when money was minted in gold but the world went off the gold standard a long time ago and that is no longer an impediment to printing more money if the policy makers so decide. Paper is cheaply available and numbers on a screen even more easily so. However, even now some countries cannot print their own money such as those in the Euro Zone otherwise Greece would have done it long ago to overcome its debt burden. What would have happened if Greece printed a lot of money? There would be inflation but the pensioners would not have been able to object as readily as they do now when their pensions are being reduced. They would get the same pension but it would buy less because of inflation and the effect would be the same. Any debt that Greece had in its own currency would be paid back easily and the creditors would not be able to complain because no one says that more has to be paid back if the prices rise. However the portion of the debt in dollars or euros would increase because with inflation the price of the dollar as determined by the flexible exchange rate would also rise. In this respect, USA is sitting pretty with its debt because most of its debt is in Dollars and if it prints a lot of extra money to cover it, it will pay it back easily. However, that would also cause severe inflation with all the extra dollars floating around. Governments have nice names for printing excess money, perhaps so that people do not catch on. They have given it names like quantitative easing, debt or deficit monetization etc.
Governments get their money through various sources like taxes, selling state assets, debt etc. They draw up a budget to spend this money. In case they spend more than their income we have what is called a budget deficit. The deficit can easily be made up through quantitative easing i.e. printing more money and increasing money supply with the attendant consequence of inflation. In case, too much inflation takes place then the controlling central banks tend to reduce money supply by various means such as increasing interest rates. The easiest way to curb inflation is to slash deficit budgets and increase interest rates until inflation is banished.
Whenever, the question of reducing state budgets and deficits is considered, some modern economists immediately propose the reduction of subsidies that may be built into the system. Although certain subsidies may be undesirable, the worst time to reduce them is when inflation is already prevailing. It will simply increase inflation further and particularly hurt the hurting population most. One may wonder why economists suggest such solutions to politicians for their approval even though it may lead to less than humanitarian consequences. The reason could be because it is not the economists who have to win votes. Their emoluments and compensation is best protected if there is GDP growth in the economy and that is best ensured through quantitative easing, no matter if the bottom half or even 99 per cent of the population suffers. The proper way to reduce deficits in inflationary times is to cut down the non-subsidy expenditure. It brings down inflation quickly and when that is banished a government may consider reducing undesirable subsidies.
Some economists view inflation as a clever form of tax that gets money into the hands of governments cleverly without having to announce a tax increase. In the view of this author it is the most despicable form of tax because it taxes the poorest of the population, unlike President Obama, who is trying to increase taxes for the richest Americans only who can easily afford it - persons making more than a quarter of a million a year. He is being given a hard time in the US congress because of it. Just shows how far the richest persons can go to protect and increase their wealth, aside from exceptions like Warren Buffet.
What about the inflation caused by a demand and supply imbalance? Will inflation not take place even without increased money supply if some item is in short supply? In this case the price of that item will increase for sure but then the price of some other items will decrease if the money in circulation remains the same and the overall rate of inflation across the board will not rise. Demand and supply imbalances and rise in price of imported things tends to increase the price of specific items, not general inflation.
If financial practices are designed within a country so that inflation is intentional, it is an unfair practice that is also inhuman because it hurts the poorer sections of society most. If inflation within a country is not intentional but takes place inadvertently, it is a clear proof of mismanagement by government. Ever since currency systems went off tangible things like gold or silver, it has become the responsibility of governments to manage the production and distribution of their chosen currencies in a manner so that inflation or deflation does not take place. The reasons for economies or individual price of goods going up or down are complex and include vagaries of nature. Governments cannot be held responsible for it all, however the production and distribution of money is the responsibility of government and they are supposed to do it in a manner so that overall inflation (or deflation as in Japan) does not take place. If they cannot, they have shirked their responsibility. If a nation is incompetent to do so they should revert to the gold standard.
If one were to devise a very rough thumb rule for ascertaining the irresponsibility of government based on the rate of inflation then one might say approximately that a government is irresponsible to the extent of ten times the rate of inflation. Thus a one per cent inflation rate implies a ten per cent irresponsibility of government managed financial systems. Ten per cent inflation therefore implies one hundred per cent irresponsibility. If it is still larger then the economic and financial system must be regarded as collapsed. If such a collapse is not due to a something as severe as a war, then those who managed the financial system must be regarded as enemies of the people. The thumb rule here is approximate as a first attempt but the message is clear. In future better ones along the same lines may emerge.
At the present time, many countries are facing recession or slowing growth. One of the methods economists suggest and use to increase growth is to increase money supply. It may also increase inflation, but then, if the technique leads to an increase of income for all the citizens, they would get compensated for the increased prices. The financial practice though shoddy would at least not be inhuman.
The present world economy has become such that even when growth takes place along with inflation then all citizens do not benefit equally. Unfortunately it is the rich who are benefiting most over the last decade as revealed by the increasing rich to poor ratios and the increasing ratio of the rich to poor incomes. In this scenario the rich get compensated for any inflation that may be taking place whereas the effective income of the poor falls because of increased prices. In effect, such a monetary easing results in taking money out of the pocket of the poor and transferring it to the pocket of the rich. It is happening now in many countries that are suffering inflation. It is in effect stealing from the poor for the rich. Robin Hood is probably turning in his grave in Sherwood Forest because of this. He stole from the rich to give to the poor unlike some modern financial planners who are in effect doing the reverse while giving it fancy names like easing and covering it with intellectual sounding arguments. There could be something noble about stealing from the rich, especially riches acquired unfairly and giving it to the poor. Wonder what the reverse is?
Dr. Ashok Malhotra holds a doctoral degree from the University of British Columbia, Canada.
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